[Federal Register Volume 62, Number 182 (Friday, September 19, 1997)]
[Notices]
[Pages 49266-49267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24861]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39064; File No. SR-Amex-97-18]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 1 to the 
Proposed Rule Change to Amend the Manner of Calculation of the Hong 
Kong Option Index

September 12, 1997.

I. Introduction

    On April 9, 1997, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act) \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the manner of calculation of the Hong 
Kong Option Index (``HK Index'').
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 38651 (May 16, 1997), 62 FR 28524 (May 23, 1997). The 
Exchange filed Amendment No. 1 to the proposed rule change on July 9, 
1997.\3\ No comments were received on the proposal. This order approves 
the proposed rule change, as amended.
---------------------------------------------------------------------------

    \3\ Amendment No. 1 clarifies how the Exchange intends to 
distinguish between the HK Index option contract using the old 
calculation method and the new HK Index option contract using the 
new floating rate calculation method. In addition, Amendment No. 1 
states that the Exchange intends to issue an Information Circular to 
advise its members of the new calculation method, discussing the new 
method and the procedures for phasing in the contracts using the new 
calculation method and phasing out those contracts using the old 
calculation method. Finally, the Exchange attached a description of 
the calculation method used by WM/Reuters for calculating their 
closing spot rates for the Hong Kong dollar. See letter from Claire 
P. McGrath, Vice President and Special Counsel, Amex, to Ivette 
Lopez, Assistant Director, Division of Market Regulation, 
Commission, dated July 8, 1997.
---------------------------------------------------------------------------

II. Description

    The proposed rule change amends the manner in which Amex calculates 
the HK Index by using a floating rate of exchange for the Hong Kong 
dollar rather than a fixed value. On April 11, 1994, Amex received 
approval to trade standardized options on the HK Index.\4\ The HK Index 
is a broad-based capitalization-weighted stock index designed and 
maintained by Amex, based on the capitalizations of 30 stocks that are 
traded on the Hong Kong Stock Exchange (``HKSE'') and whose issuers 
have major business interests located in Hong Kong. The HK Index value 
is calculated by multiplying the price of each component security (in 
Hong Kong dollars) by its number of shares outstanding, adding the 
sums, and dividing by the current HK Index divisor. For valuation 
purposes, one HK Index unit is assigned a fixed value of one U.S. 
dollar. The Exchange adopted a fixed value for the HK Index unit 
because Hong Kong has traditionally pegged the value of the Hong Kong 
dollar to the U.S. dollar.\5\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 33894 (April 11, 
1994), 59 FR 18429 (April 18, 1994).
    \5\ As of April 14, 1997, the exchange rate was approximately HK 
$7.75 per U.S. $1.
---------------------------------------------------------------------------

    At midnight on June 30, 1997, sovereignty over Hong Kong 
transferred from the United Kingdom to the People's Republic of China, 
and Hong Kong became a Special Administrative Region of China. In its 
filing, Amex notes that while there has been much debate over what this 
will mean financially, politically, and socially for the former British 
colony, statements from the People's Republic of China indicate that 
the existing currency and financial systems of Hong Kong will remain 
unchanged. In order, however, to be prepared for any possible changes 
with respect to the Hong Kong dollar, such as a change in the policy of 
pegging its value to the U.S. dollar, the Exchange has determined to 
adopt a floating rate of exchange for the Hong Kong dollar when 
calculating the value of the HK Index.
    Amex will use the WM/Reuters Hong Kong dollar/U.S. dollar exchange 
rate available at 4 p.m. London time, which is based on market rates. 
These underlying market rates will be commercial interbank bid and 
offer rates. Representative rates for each currency are selected based 
on a number

[[Page 49267]]

of ``snapshots'' of the latest contributed quotations taken from the 
Reuters System. Amex will receive this exchange rate between 
approximately 11:30 a.m. and 12:00 noon (New York time) each trading 
day. The Exchange will then use this rate in calculating and 
disseminating the HK Index value after it is received on that trading 
day, and will also use the rate in calculating and disseminating the HK 
Index value on the following day until a new value is received, again 
typically between 11:30 a.m. and 12:00 noon.\6\ If on any business day 
WM/Reuters does not post a closing spot exchange rate for the Hong Kong 
dollar, the last reported closing spot rate will remain in effect until 
a new rate is posted. Amex intends to establish a separate contract on 
the HK Index using the floating rate in its calculation. The current 
contract using the fixed rate will continue to trade until the 
expiration of any remaining contracts.\7\ No new series will be added 
using the fixed rate after the new floating rate calculation goes into 
effect. Until a phase-out of the current contract using the fixed rate 
is complete, options on both indexes will be trading simultaneously 
using different symbols.\8\
---------------------------------------------------------------------------

    \6\ The Commission notes that if, for some reason, WM/Reuters 
changes the exchange rate after it has already been disseminated, 
Amex will correspondingly recalculate the Index value, if the change 
occurs during the trading day. When a change occurs on a settlement 
day, the new Index value will be used for settlement purposes if it 
is calculated prior to settlement. Telephone conversation between 
Claire P. McGrath, Vice President and Special Counsel, Amex, and 
Heather Seidel, Attorney, Market Supervision, Commission, on 
September 9, 1997.
    \7\ As of April 15, 1997, the outstanding interest in HKO Index 
contracts with expiration dates after July 1, 1997 was as follows: 
September 1997 series, 2042 contracts; December 1997 series, 835 
contracts; and January 1998 series, 162 contracts. Phone 
conversation between Claire McGrath, Managing Director and Special 
Counsel, Amex, and Heather Seidel, Attorney, Market Regulation, 
Commission, on April 18, 1997.
    \8\ See Amendment No. 1, supra note 3. Currently the Exchange 
has the following series on the current HK Index option trading: 
July 1997; August 1997; September 1997; October 1997; November 1997; 
December 1997; March 1998; and January 1998 (reduced value). 
Therefore, once the March 1998 contracts expire, the Exchange will 
have only one HK Index option trading which will calculate the index 
using a floating rate of exchange for the Hong Kong dollar rather 
than the fixed rate currently being used. Id.
---------------------------------------------------------------------------

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b) of the Act.\9\ 
Specifically, the Commission believes the proposal is consistent with 
the section 6(b)(5) \10\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, and, in general, to protect investors 
and the public.\11\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change will help to 
protect investors and the public by guarding against the possibility of 
a change in the exchange rate for the Hong Kong dollar, now that 
control of Hong Kong has reverted to China, as of midnight on June 30, 
1997. The current exchange rate is a fixed rate that does not change 
and which is pegged to the U.S. dollar so that each Hong Kong Index 
unit is valued at one U.S. dollar.\12\ The new rate will be a floating 
rate, based upon the daily exchange rate calculated by WM/Reuters, and 
the Index level will be multiplied by the exchange rate in order to 
determine the Index value. This change will allow Amex to protect 
against fluctuations in the exchange rate between the U.S. dollar and 
the Hong Kong dollar.
---------------------------------------------------------------------------

    \12\ For example, if the Index is at 300, the value in U.S. 
dollars is $300.
---------------------------------------------------------------------------

    The Commission also notes that the Exchange has adequately 
addressed concerns about investor confusion over the simultaneous 
trading of HK Index options contracts using the current valuation 
method, and the HK Index options using the new fluctuating rate method 
for a certain period of time. The two contracts will be assigned 
different trading symbols for identification purposes. In addition, the 
Exchange will issue an Information Circular to its members discussing 
the new calculation method and the procedures for phasing in the 
contracts using the new calculation and phasing out those contracts 
using the old calculation method.
    The Commission finds good cause to approves Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, by clarifying that Amex will distinguish between the old 
and new contracts by using different symbols, and by stating that Amex 
will advise its members of the change in the method of calculation for 
the HKO Index, Amendment No. 1 will help ensure that members of the 
Exchange receive adequate notice of the change in the method of 
calculation of the HKO Index and the procedures for phasing in the 
contracts using the new method of calculation and phasing out the 
contracts using the old calculation method. Accordingly, the Commission 
believes that it is consistent with section 6(b)(5) of the Act to 
approve Amendment No. 1 to the proposal on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal. Persons 
making written submissions should file six copies thereof with the 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Amex-97-18 and should be 
submitted by October 10, 1997.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-AMEX-97-18), as amended, is 
approved.

    \13\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24861 Filed 9-18-97; 8:45 am]
BILLING CODE 8010-01-M